Study on International Financial Reporting

Standards IFRS and the reasons for its adoption

- Sakshi Jaiswal
B.com. Honours 2nd year
Idyllic Institute of management, prithampur,
RAU.

Abstract
The study aims to identify the reasons for the global trend to adopt
international financial reporting standards, as the stage of adopting
international financial reporting standards is an important stage for interested
parties. Therefore, the research goal focuses on studying the mechanisms to
be adopted in countries whose financial markets are inactive, which increases
the difficulty of adopting standards. Financial reporting for the first time in light
of the lack of prior adoption of international financial accounting standards in
it and the adoption of these countries on local standards that are not updated
in accordance with international financial accounting standards, by studying
the accounting literature that transact with the topic of research, and the
study reached a conclusion that the adoption of financial reporting standards
International IFRS contributes directly to the process of selecting accounting
policies, which is positively reflected in the process of standardization and
harmonization of accounting principles applied locally in developing countries;
They must be international, which makes them generally accepted
international accounting principles. The adoption of international financial
reporting standards also contributes to a positive impact on the way of
interpreting the financial statements.

Introduction
The pursuit of quality and uniformity in preparing financial statements has led
to the introduction of International Financial Reporting Standards (IFRS). Most
of the countries of the world have joined in adopting international financial
reporting standards in order to improve the quality of financial reporting.
Through review of the accounting literature on the implementation of
international financial reporting standards, these studies have demonstrated
that the financial statements are viewed as providing relevant, reliable and
comparable financial information from one accounting year to another.
Understanding the impact of international financial reporting standards on a
company's financial performance is critical to the ability of investors, auditors,
and financial analysts as well as academic institution researchers to make
informed decisions. As a result of the harmonization of international Financial
reporting standards, the adoption of IFRSs has been widely accepted by various
countries of the world. Financial reports can only be considered useful if they
represent the "economic core" of the economic unit in terms of relevance,
reliability and comparability, and the useful accounting information derived
from qualitative financial reports helps in the ineffective allocation of
resources by limiting the presentation of overshadowed information. There is a
need to adopt and adopt reporting standards. International Finance.
Understanding the stages of issuing and adopting international financial
reporting standards by countries that implement or intend to do so is a
roadmap that saves them from many deviations in the proper application of
international financial reporting standards
Literature Review and Hypothesis Development
Accounting is closed linked with the economic and political environments.
Existing a variety of parties, according to their economic benefit, are interested
in the development of accounting standards. As a matter of facts, institutional
theory has come to be regarded as a dominant theoretical perspective in
organizational theory research. Accounting in real cannot be isolated from the
social processes operating in and around organization. Accounting as a social
and institutional practice has come to view the phenomenon of accounting as
a symbol of legitimacy. Adopting IFRS appears to reduce information
asymmetry between managers and stockholders. Previous literature finds a
reduction of information asymmetry as evidenced by lower earnings
management, lower costs of capital, and lower forecast errors. We examine
each of these economic consequences below. Barth et al. [2] suggest that
accounting quality could be improved with elimination of alternative
accounting methods that are less reflective of firms’ performance and are used
by managers to manage earnings. They compare earnings management for
firms that voluntarily switch to IFRS with firms that use domestic accounting
standards. They find that after IFRS adoption, firms have higher variance of
changes in net income, a higher ratio of variance of changes in net income to
variance of changes in cash flows, higher correlation between accruals and
cash flows, lower frequency of small positive net income, and higher frequency
of large losses. Barth et al. [2] also investigate the value relevance of earnings
by comparing the R-squared from two regressions: 1) price regressed on book
value and earnings; and 2) earnings regressed on positive and negative returns.
They find that R-squared increases after IAS adoption, providing evidence of
greater value relevance for IFRS earnings. Based on the above arguments, we
propose the following research hypothesis: H1: There is a positive association
among mandatory adoption IFRS, institution environment and the income
smoothing. H2: There is a positive association among mandatory adoption
IFRS, institution environment and the value relevance

Problems of applying international accounting standards: Many studies have

indicated that there are difficulties and limitations facing the application of
international accounting standards, as they confirmed that these difficulties
are caused by economic, regulatory and legislative factors, as well as tax laws
and the local cultural environment of countries (Daske, 2008: 19). As the
inability to apply international accounting standards without being compatible
with the local environment to be suitable for it will lead to deviation of these
standards from their basic function (Perera 1989: 156. Both (Nour and Al-
Jajawi, 2003: 6) and Hamidi have specified, 2017: 44) the difficulties and
limitations facing international accounting standards, namely: First: the local
environmental culture: Differences in the historical and cultural characteristics
and institutional frameworks of any country play an important role in
determining the form and content of accounting standards. If there is an
appropriate set of accounting standards in a country, it cannot be suitable for
another country, especially in economies in transition from economic systems
to other economic systems, this was confirmed by the case study of
implementation in the Russian economy. The results of the studies
demonstrated the existence of difficulties and limitations, as well as a
mismatch between international accounting standards and the needs and
objectives of the local transitional environment in which the standards were
implemented. Second: the nature of the economic system: The difference in
economic systems represents one of the main determinants of the
classification of international accounting standards. In non-open socialist
systems, for example, North Korea, Iran and Syria, it is not possible to apply
these standards. Multinational companies. Third: Legislative Determinants:
That the adoption of international standards requires amending the legislation
that affects the accounting practice, especially the tax. The accounting practice
is linked to the laws and legislation in force and the result. In some countries,
the goal of preparing financial reports is to calculate tax profit, or to produce
information that helps the national planner prepare data that help in preparing
budgets. And planning and decision-making at the national level. Fourth: Other
Determinants: There are other difficulties and limitations that stand against
the good implementation of international accounting standards because the
application of these new standards adds other costs, as well as there are
standards that have been elaborated in a complex way, especially those
standards related to investments, derivatives and financial instruments, as well
as there are important side matters as it is known that international standards
are issued In the English language and in well-known English accounting
terminology, as the problem of translating these standards into local languages
arises, and the existence of a knowledge gap between the bodies issuing
international standards and the pioneering bodies in their application on the
one hand and the bodies that wish to adopt or are compelled to adopt on the
other hand. The importance of adopting international financial reporting
standards: International Financial Reporting Standards (IFRS) represent a set of
accounting standards developed under the supervision of the International
Accounting Standards Board (IASB). These standards serve as an international
standard to ensure consistency and consistency when preparing highquality
financial reports at the international level (Supriadi 2018: 52). International
Accounting Standards Board David Tweede in 2003 the importance of
international financial reporting standards (IFRS) in removing obstacles in the
accounting profession, and the most important of these obstacles is the
constant absence of national accounting standards in many countries

Professional and practical challenges facing financial reporting

standards: Several countries adopted the International Financial Reporting
Standards (IFRS) coinciding with the financial crisis in the year 2008, which was
considered the main event in the business environment in the first decade of
the twenty-first century, as it was expected that the adoption of the
application of international financial reporting standards (IFRS) leads to
improving the quality of Financial reports, on the other hand, the period of the
occurrence of the financial crisis was a bad economic period for companies, as
it was expected to negatively affect the economic performance of companies
applying these standards, so the possibility appeared that these companies
would manipulate the preparation of financial reports taking advantage of the
application and the financial crisis, and that from In order to better show its
financial position and performance, moreover, changes could negatively affect
the quality of the financial reports that were made on international financial
reporting standards from the International Accounting Standards Board in light
of the financial crisis (Alappatt, 2020: 15). Therefore, the application of
international financial reporting standards has become a problem because it
was formulated in an atmosphere suitable for global markets, and especially
this problem is identified with countries that were applying accounting systems
consistent with generally accepted accounting principles (GAAP), which differ
fundamentally from international financial reporting standards

Empirical Results and Discussions

The empirical results show that earnings smoothing is associated with IFRS and
the institutional environment, IFRS coefficient of 0.004 and 1% significance
level, and expected the same as [], the results that China will adoption the IFRS
after the guidelines can improve the volatility of the surplus earnings
smoothing phenomenon has improved to support the hypothesis of this study.
The institutional environment (INST) coefficient of -0.005, 1% significance level,
although contrary to the expected direction of the study, regardless of the
institutional environment is good or bad, earnings smoothing is very serious,
does not support hypothesis 1. Morck, Yeung and Yu [8] found that emerging
capital markets, corporate level information content is very low in the 40
sample countries, the severity of China's capital market ranks second. The
inference may be due to local institutional environment in China are not fairly
perfect. The variable of IFRS × INST coefficient -0.004, 10% significance level,
this article is expected the opposite, but the coefficient is smaller than the
INST, on behalf of IFRSs into earnings smoothing has also affected due to new
accounting standards adoption, the effect of its influence local institutional
environment, so the coefficient is still negative, empirical results support the
hypothesis. In summary, the empirical study reveals significantly higher quality
in reported accounting measures after the mandatory adoption of substantially
IFRS-convergent accounting standards in China with decreased earnings
smoothing and increased value relevance to stock price. The findings also
empirically confirm previous researchers’ argument that IFRS can be relevant
to countries like China where economic and social environments and
accounting needs become similar to those of advanced economies [9].

Conclusion
That the adoption of international financial reporting standards IFRS
contributes directly to the process of selecting accounting policies, which is
reflected positively in the process of standardization and harmonization of
accounting principles applied locally at the country level, making them
generally accepted international accounting principles. The adoption of
international financial reporting standards also contributes to a positive impact
in the manner of Interpretation of financial statements. The adoption of
international financial reporting standards leads to the most effective use of
this data by stakeholders of all kinds, such as shareholders, investors, creditors,
banks, government agencies, and even employees. That the adoption of the
International Financial Reporting Standards IFRS contributes directly to the
process of selecting accounting policies, which is reflected positively in the
process of standardization and harmonization of accounting principles applied
locally at the country level, making them generally accepted international
accounting principles. The International Financial Reporting Standards (IFRS)
have worked to limit flexibility in accounting policies and alternatives, which
was one of the most important flaws in the phase of adopting GAAP.

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